Agriculture, Food and the TTIP: Possibilities and Pitfalls
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Agriculture, Food and the TTIP:
Possibilities and Pitfalls
Tim Josling and Stefan Tangermann
Paper No. 1 in the CEPS-CTR project “TTIP in the Balance’’
and CEPS Special Report No. 99 / December 2014
Abstract
Progress in agriculture and food issues in the TTIP talks will largely be determined by the level
of ambition in the negotiations as a whole. If ambitions are modest, a low-level agreement
could probably be reached that includes some limited commitments on agricultural market
access and food regulations. These could include promises of mutual support in the area of
opening up agricultural markets through the WTO and of further Transatlantic cooperation in
trying to resolve conflicts over food regulations. Bolder ambitions would allow more scope for
tackling the difficult problems, though at the cost of time. It would be unfortunate if the
opportunity were not taken to make some significant progress in removing some long-
standing irritants in the area of agricultural policy and food regulations: this is where the
economic gains are likely to be significant and the spill-overs useful. This paper argues the
case that it is worthwhile making the effort to secure a constructive and imaginative agreement
on agriculture and food regulations in the TTIP. A fairly detailed suggestive list of potential
sub-deals in agro-food, supported by the analysis in the paper, is the most concrete one of a
series of policy conclusions.
This paper is the first paper in the “TTIP in the Balance” project, jointly organised
by CEPS and the Center for Transatlantic Relations (CTR) in Washington, D.C.
It is published simultaneously on the CEPS (www.ceps.eu) and CTR websites
(http://transatlantic.sais-jhu.edu). For more information about the project,
Transatlantic Trade please see the penultimate page of this paper.
and Investment
Partnership The views expressed in this report are those of the authors only and do not
necessarily represent those of CEPS, CTR or the institutions with which they are
associated.
ISBN 978-94-6138-435-5
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or
transmitted in any form or by any means – electronic, mechanical, photocopying, recording or
otherwise – without the prior permission of CEPS and CTR.
© Centre for European Policy Studies/Center for Transatlantic Relations 2014
Center for Transatlantic Relations, Johns Hopkins University SAIS ▪ 1717 Massachusetts Ave., NW, Suite 525
Washington, D.C. 20036 ▪ Tel 001.202.663.5880 ▪ http://transatlantic.sais-jhu.edu
Centre for European Policy Studies ▪ Place du Congrès 1 ▪ B-1000 Brussels ▪ Tel: (32.2) 229.39.11 ▪ www.ceps.eu
TABLE OF CONTENTS
Introduction ......................................................................................................................................1
1. Agriculture and food in transatlantic trade............................................................................1
1.1 Trade flows in agricultural and food products ...............................................................2
1.2 Tariff barriers .....................................................................................................................4
1.3 Non-tariff trade impediments ..........................................................................................6
2. Estimates of benefits from TTIP ..............................................................................................7
2.1 Impact on trade flows .......................................................................................................7
2.2 Trade impacts of NTMs ....................................................................................................8
3. Possible modalities for the negotiations .................................................................................9
3.1 Negotiations on market access ....................................................................................... 10
3.1.1 Rules of origin........................................................................................................ 11
3.2 Negotiations on subsidies............................................................................................... 13
3.2.1 Export subsidies ....................................................................................................13
3.2.2 Domestic subsidies ................................................................................................ 13
3.3 Negotiations on regulatory convergence ...................................................................... 14
3.3.1 Harmonisation ....................................................................................................... 16
3.3.2 Mutual recognition ................................................................................................ 16
3.3.3 Equivalence ............................................................................................................ 17
3.4 Alternative approaches ...................................................................................................18
3.4.1 Labelling as a positive strategy ............................................................................ 18
3.4.2 Hands-off approach: Diversity is good................................................................ 19
4. Possible landing zones ........................................................................................................... 19
References ....................................................................................................................................... 25
List of Box, Figures and Tables
Box 1. ROOs and EU FTAs ............................................................................................................ 12
Figure 1. Food and agricultural trade between the EU-27 and the US, 2000-12 .........................2
Figure 2. EU and US tariff profiles in agriculture: MFN applied duties......................................5
Figure 3. EU and US tariff profiles in agriculture: maximum applied MFN duty within the
respective product group ...............................................................................................6
Table 1. Intra-industry trade in major EU-US trade flows in the food and agriculture sector ..4
Table 2. Estimated impacts of TTIP on bilateral trade flows (‘reference’ scenario percentage
deviation from baseline in 2025) ......................................................................................8
Table 3. Estimated impacts of TTIP on US and EU real income and exports for alternative
scenarios (percentage deviation from baseline in 2025) .................................................8
Table 4. Estimates of ad valorem equivalents of NTMs and tariffs in the sector of agriculture
and food in the EU and the US .........................................................................................9
Table 5. Potential landing zones for agriculture and food in the TTIP ...................................... 24
Agriculture, Food and the TTIP:
Possibilities and Pitfalls
Tim Josling and Stefan Tangermann*
Paper No. 1 in the CEPS-CTR project “TTIP in the Balance’’
and CEPS Special Report No. 99 / December 2014
Introduction
Agriculture is always a difficult area in trade negotiations. The US and the EU have butted
heads on the issue of market access and export subsidies for 50 years, as each tries to protect
its own farm interests and farm programmes. However, a combination of domestic reforms,
WTO constraints and firmer world market prices has reduced the gap between US and EU
farm product prices and led to a possible opening up of trade across the Atlantic. Food trade
issues are also tricky: countries are hesitant to change engrained regulatory habits. In the last
20 years there have been significant disagreements between the US and the EU over food
regulations, and in particular food safety standards. In some instances there has been
convergence of standards; in other areas the differences in regulations and standards appear
unbridgeable. Moreover, the differences in food safety regulations have played into the public
debate about TTIP, narrowing the room for flexibility, particularly on the side of the EU. But
with the extensive development of supply chains in the food industry, the need for more
cohesion in food safety and food quality rules is becoming increasingly urgent.
The progress in agriculture and food issues in the TTIP talks will largely be determined by the
level of ambition in the negotiations as a whole. If ambitions are modest, a low-level agreement
could probably be reached that included some limited commitments on agricultural market
access and food regulations. These could include promises of mutual support in the area of
opening up agricultural markets through the WTO and of further transatlantic cooperation in
trying to resolve conflicts over food regulations. Bolder ambitions would allow more scope for
tackling the difficult problems, although at the cost of time. It would be unfortunate if the
opportunity were not taken to make some significant progress in removing some long-
standing irritants in the area of agricultural policy and food regulations: this is where the
economic gains are likely to be significant and the spill-overs useful. This paper will make the
case that it is worthwhile making the effort to secure a constructive and imaginative agreement
on agriculture and food regulations in the TTIP.1
1. Agriculture and food in transatlantic trade
To put the agricultural issue in perspective, it is useful to review the extent and nature of
transatlantic trade flows in agriculture and food products and the tariff and non-tariff barriers
* The authors are Senior Fellow at the Freeman Spogli Institute for International Studies, Stanford
University, and Professor emeritus at the Department of Agricultural Economics and Rural
Development, University of Göttingen, respectively. Helpful comments on an earlier draft received
from Daniel Hamilton, Jacques Pelkmans and Jo Swinnen are gratefully acknowledged.
1For a detailed discussion of the 50-years history of agricultural trade relations between the US and the
EU and implications for the TTIP negotiations, see Josling & Tangermann (forthcoming).
1
2 JOSLING & TANGERMANN
that exist. These non-tariff barriers mainly reflect differences in food regulations and standards,
and have attracted public attention beyond their economic significance. The TTIP agenda in
agriculture will reflect the balance between the economic interests of the US and the EU in
these areas and the extent to which each of the negotiating partners have room to make
accommodating changes to policies.
1.1 Trade flows in agricultural and food products
The value of transatlantic trade in food and agricultural products (chapters HS 1-24 of the tariff
code) has been increasing modestly over the past 20 years mainly as a result of increased
exports of food and beverage products. Trade values slumped a little with the economic
downturn in 2007-08 but the expansion of trade has been rather rapid since 2009, reaching $23
billion in 2012. The EU has generally exported more agricultural and food products to the US
than it imports from that source, and now shows a surplus of $9 billion on transatlantic
agricultural and food trade (see Figure 1). Much of this surplus is accounted for by buoyant
exports of beverages and spirits and of processed foods. EU producers have been reasonably
successful in gaining access to the US market, up 48% since 2000. Although the importance of
the US as a trading partner in agriculture and food for the EU is somewhat less than it is for
total merchandise trade, the US remains the largest single export market for the EU's
agriculture and food industry.
Figure 1. Food and agricultural trade between the EU-27 and the US, 2000-12
Billion EUR
EU
16 ag+food
14 exports to
US
12
EU
10
ag+food
8 imports
6 from US
4 EU
ag+food
2 trade
0 balance
with US
Source: Josling & Tangermann (forthcoming).
With respect to food and agricultural imports into the EU, the US is a relatively minor supplier
(only 8%) of EU food and agricultural imports. The US trails well behind Brazil as a source of
the EU's food and agricultural imports: Brazil sells 70% more agricultural and food products
to the EU than does the US. Correspondingly, the EU is a relatively unimportant market for
US agricultural and food exports. Moreover, the importance of the EU as an agricultural
trading partner for the US has declined steadily over time with the growth of markets in Asia:
the ‘pivot to Asia’ has certainly taken place in US agricultural trade. US exporters to the EU of
food and agricultural products have found themselves with a stagnant market for the past
decade, down 6% since 2000. This difference between the US and the EU in the significance of
AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 3 transatlantic agricultural trade could prove an important aspect of the political backdrop to the TTIP negotiations.2 Certain types of food and agricultural products dominate these trade flows. By far the largest item in the EU’s exports of agricultural and food products to the US is accounted for by beverages and spirits (HS 22), where EU exports of spirits, wine and beer figure most prominently (and in that order).3 That sector makes up one-half of all EU food and agriculture exports to the US. No other sub-sector in the field of food and agriculture (at the 2-digit HS level) accounts for more than 6% of the EU’s transatlantic food and agricultural exports.4 The largest category of imports into the EU in food and agriculture trade from the US is edible fruit and nuts (HS 08), such as almonds and walnuts, followed by oilseeds and oleaginous fruit (HS 12) including soybeans. These two subsectors represent 18% and 16% respectively of the total of all EU imports from the US in the food and agriculture sector, and are more important than beverages and spirits (14%), and cereals (6%). The difficulties in selling genetically modified (GM) products in Europe has been in part a cause of the slow growth, but as significant has been the success of Latin America in providing bulk commodities to Europe. One might expect in such a two-way trade pattern that there would be significant trade flows in both directions within each individual product sector, at least for processed foods that are less homogeneous than raw agricultural commodities. This ‘intra-industry trade’ could be as politically significant as trade among sub-sectors. One widely-used measure of the extent of intra-industry trade is the Grubel-Lloyd index (Grubel & Lloyd, 1975). That index lies between 1, indicating that all trade in the sub-sector concerned is of an intra-industry nature, and zero, signalling that there is no two-way trade flow within the sub-sector concerned. The Grubel- Lloyd index for EU-US trade in food and agricultural products (at the level of 2-digit HS product groups) is presented in Table 1, where product sectors are arranged in decreasing order of their share in total EU-US trade.5 The Grubel-Lloyd index shows that for the nearly all of the most important product sectors in agricultural and food trade between the EU and the US (including the major trade flows in the beverages sector) there is relatively little intra- industry trade. Major exceptions are three rather heterogeneous product sectors (animal or vegetable fats and oils; miscellaneous edible preparations; preparations of vegetables, fruit, nuts) where such inter-industry trade is to be expected. 2 This raises the question as to whether it is successful exporters who take the lead in trade negotiations or those who are frustrated by slow growth in certain markets. One assumes that exporter concerns focus on import barriers into potentially lucrative markets. 3 Trade shares reported here relate to the average of 2010-12. 4For convenience we use ‘transatlantic’ to refer to US-EU trade and not trade between the EU and Canada. 5 That share is defined as the percentage of EU exports to the US plus EU imports from the US of the product sector concerned in the aggregate of all EU exports plus imports in food and agriculture in trade with the US, for the average of 2010-12. Table 1 contains all product sectors where that percentage is 3% or more. The broad definition of the sectors might lead one to expect that relatively high degrees of intra-industry trade would be found.
4 JOSLING & TANGERMANN
Table 1. Intra-industry trade in major EU-US trade flows in the food and agriculture sector
Grubel-Lloyd Share in total EU-US
HS Product sector
index agricultural and food trade
22 Beverages, spirits and vinegar 0.273 35.6%
08 Edible fruit and nuts etc. 0.157 7.0%
12 Oilseeds and oleaginous fruits etc. 0.226 6.5%
15 Animal or vegetable fats and oils etc. 0.624 4.5%
21 Miscellaneous edible preparations 0.983 3.8%
20 Preparations of vegetables, fruit, nuts etc. 0.587 3.7%
Residues and waste from the food
23 0.308
industries etc. 3.3%
04 Dairy produce, birds' eggs etc. 0.165 3.3%
18 Cocoa and Cocoa preparations 0.101 3.1%
19 Preparations of cereals etc. 0.229 3.0%
Source: Authors’ own calculations.
On this basis it might appear that in the agriculture and food sector the US and the EU are
primarily engaged in trade where the respective exporter has a clear comparative advantage,
i.e. where there is not much of an issue of competition between these trading partners but
rather the less-contentious trading relationship of complementarity. However, the existing
structure of trade is the result of the current regime of trade and regulatory policies – i.e. of
precisely the policies that are set to be liberalised and harmonised as a result of the TTIP. So
the low degree of intra-industry trade could be interpreted as an indication of a potential for
an increase in such trade if barriers could be reduced.
1.2 Tariff barriers
As a result of many rounds of multilateral trade negotiations, tariff barriers on transatlantic
trade are already relatively low. Average trade-weighted tariffs on imports into the US stand
at 4.7%: the corresponding average tariff for the EU is 6.4%. Even in the case of agriculture and
food products, the average MFN tariff applied on all agricultural and food products by the US
is only 3.9%.6 In the EU, the average tariff is more than double that figure, at 8.6%, but even
that appears reasonably low compared to agricultural tariffs in other countries. However,
these averages hide significant tariff peaks in sensitive products (agriculture, textiles,
beverages, etc.). Figure 2 shows tariff profiles across individual product groups within
agriculture. The EU maintains a tariff level above 50% to protect dairy products, above 30% in
the sugar and confectionary sector, and around 20% for animal products as well as for
beverages and tobacco. In the US, tariffs are highest in dairy products, beverages and tobacco
and sugar. In all product sectors, with the exception of cotton (where EU output is close to
zero), EU tariffs are considerably higher than those of the US.
Moreover, trade-weighted tariff averages tend to under-represent these tariff peaks as import
volumes of such products tend to be small. And the average includes those tariffs in
agriculture (at the 6-digit HS level, MFN applied) that are already duty free, accounting for
30.7% of tariffs in the US and 31.2% of tariffs in the EU 31.2%. High tariffs themselves are
somewhat unevenly distributed: tariffs above 15% are found in only 5.3% of all agricultural
product categories in the US, while in the EU 26.2% of all product categories in agriculture
have tariffs above that level.
6Source of tariff information discussed here is WTO, ITC and UNCTAD (2013), as well as European
Parliament (2014).AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 5
This disparity is even more apparent if one examines more disaggregated information on tariff
levels: this is more likely to identify the so-called 'sensitive' products that can pose particularly
potent political problems. Some of the levels that these mega-tariffs can attain are shown in
Figure 3.7 The dairy sector in the EU is protected, for example, by a mega-tariff of up to 600%
and in other agricultural sectors there are four cases of tariffs above 100%.8 In the US, the
highest tariff, at 350%, is found in the beverages and tobacco sector, and there are two other
sectors with a tariff above 100%.9 Thus, the common view that tariffs, including those for
agricultural products, will not be a major obstacle in the TTIP negotiations may be somewhat
premature. Free bilateral trade will cause some disruption. There will be a request for long
transition periods and safeguards for sensitive products (Trachtenberg, 2012). The political
economy of trade negotiations will be fully on display as interest groups, from sugar, beef and
dairy to fruits, nuts and vegetables, will play their cards. The dilemma for trade negotiators
will be whether to exclude sensitive sectors that are protected by high tariffs, so as to avoid
the talks getting bogged down, or to hope that lofty ambitions will carry enough weight to
overcome sector resistance.
Figure 2. EU and US tariff profiles in agriculture: MFN applied duties
%
60
EU US
50
40
30
20
10
0
Source: WTO, ITC & UNCTAD (2013).
7It should be noted that the vertical axis of Figure 3 extends to much higher tariff levels than that of
Figure 2.
8Mega-tariffs are often specific tariffs, and their estimated ad valorem equivalent depends on the import
price assumed. This is one reason why alternative sources report different levels of maximum (ad
valorem equivalent) tariffs.
9It is also worth noting that mega-tariffs of such orders of magnitude are an exclusive agricultural
phenomenon. Outside the agricultural sector, the highest tariff rate reported for the EU is 26% (in the
product group fish & fish products), and that for the US is 55% (in the group leather, footwear, etc.).6 JOSLING & TANGERMANN
Figure 3. EU and US tariff profiles in agriculture: maximum applied MFN duty within the respective
product group
%
700
600
EU US
500
400
300
200
100
0
Source: WTO, ITC & UNCTAD (2013).
1.3 Non-tariff trade impediments
Even though it may be difficult to approach complete tariff elimination in agricultural trade
between the US and the EU, the biggest hurdle in the trade part of the TTIP negotiations is
reduction of the trade barriers resulting from non-tariff measures (NTMs).10 However, this is
also the element that can generate the largest benefits. Thus it will be crucially important to
find an effective way forward in dealing with the many NTMs, both at and behind the border,
that result from diverging regulatory approaches used in the two entities. In many cases these
NTMs stand in the way of harmonious trade relations across the Atlantic, and in a number of
instances they have caused, and continue to cause, serious acrimony and legal disputes in the
WTO. Though NTM issues cause difficulties in US-EU trade relations across the board in all
sectors, they are particularly pronounced and troublesome in the agriculture and food sector,
where particular problems result from health and safety (sanitary and phytosanitary – SPS)
measures.
The main impetus behind dealing with NTMs will come from the US. Agricultural businesses
in the US want a number of long-standing regulatory issues with the EU resolved. They
perceive these as the major impediments to market access. These include the use of growth
additives in livestock, methods of pathogen reduction in slaughterhouses and approval of
genetically modified varieties of corn and soybeans (Grueff, 2013).11 But not all the offensive
interests are on one side of the Atlantic. Agricultural and food producers in the EU would like
better access to the US market, specifically for dairy products and meats. As EU milk quotas
are abolished, the need to find overseas markets for cheeses and other high-value dairy
products will increase. Moreover, the EU would like more protection for geographical
indications (GIs) in the US, for cheese and for specialty meats (as well as wines), an issue that
has led to stalemate in the context of the TRIPS negotiations.
10The value of removing non-tariff barriers to trade is notoriously hard to quantify. As shown below,
studies find considerable economic benefits from the harmonisation of regulatory measures in the
transatlantic marketplace, benefits that by far exceed those resulting from tariff elimination.
11GM crops are approved for sale on the EU market only after an extensive scientific investigation as to
their safety to health and the environment. The slowness of this process was at the root of a WTO
challenge by the US on the EU’s biotech approval process.AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 7 2. Estimates of benefits from TTIP A number of recent studies have aimed at estimating the potential quantitative impacts of a TTIP on variables such as GDP, trade and output in the US, the EU and third countries.12 These models include agriculture, although often at a highly aggregated level. Most of the studies have employed some type of a computable general equilibrium (CGE) model for the analysis, representing the whole economy, disaggregated into several sectors, and including all important feedback mechanisms, in particular linking income generation with expenditures for both consumers and governments. In the models a number of individual countries are identified, in particular the US and the EU, while the rest of the world, closing the global model, is often treated as one country. As one might expect, results differ from study to study, depending on factors such as the structure of the model and its parameters, underlying data, the baseline assumed (in the absence of TTIP) and the scenarios considered. A study by Fontagné et al. (2013) conveys the types of impacts of agricultural trade liberalisation suggested by such models, and their orders of magnitude. The modelling framework used in that study is dynamic, generating future time paths for all variables. The results shown below are those for the year 2025, expressed as percentage deviations from the baseline (in which no TTIP is assumed), in constant prices. 2.1 Impact on trade flows Estimated impacts on bilateral trade flows are summarised in Table 2, for the ‘reference’ scenario, assuming a complete phasing out of all tariffs, and a 25% cut in the trade restrictiveness of all NTMs, for all sectors of the US and EU economies. The impacts of liberalising trade between the US and the EU are found to be significant: bilateral trade between the US and the EU would increase by around half overall, indicating the extent to which current barriers prevent the transatlantic trade potential from being fully tapped. As the highest trade barriers in both the US and the EU are currently found in agriculture, agricultural trade flows are estimated to expand significantly in both directions, by 150% and more. The estimated strong expansion of bilateral trade within a US-EU free trade area (FTA), indicating a potential for large trade creation, might be expected to result in considerable trade diversion at the expense of third countries, as their exports to the US and the EU would no longer be so competitive. Yet, perhaps surprisingly, the authors find that trade diversion would be rather small under a TTIP, with US and EU trade flows from and to third countries declining by less than 3%. 12 See, for example, Ecorys (2009 and 2012), Felbermayr et al. (2013), Fontagné et al. (2013), Francois et al. (2013), Kinnman & Hagberg (2012) and European Parliament (2014).
8 JOSLING & TANGERMANN
Table 2. Estimated impacts of TTIP on bilateral trade flows (‘reference’ scenario percentage deviation
from baseline in 2025)
Exporter Importer Total Agriculture Industry Services
Transatlantic trade
US EU27 52.5 168.5 66.4 14.0
EU27 USA 49.0 149.5 61.8 24.0
Other trade flows
US RoW -1.4 -1.9 -1.3 -1.6
EU27 RoW -1.4 -0.4 -1.4 -1.4
RoW USA -2.5 -0.8 -2.8 -0.7
RoW EU27 0.2 -1.5 0.1 0.6
EU27 EU27 -1.2 -2.6 -2.3 2.8
RoW RoW 0.1 -0.0 0.2 0.2
Note: RoW refers to the rest of the world.
Source: Fontagné et al. (2013).
The study also estimated the impact of the components of the tariff and NTM package
separately. These results are summarised in Table 3, for the ‘reference’ case and four
alternative policy scenarios. In the ‘tariffs only’ scenario, only tariffs are phased out. Under
‘targeted NTM cuts’, NTMs that are more restrictive than the median of the respective sector
(agriculture, industry or services) are reduced by 30%, while the remaining ones are cut by
15%. The scenario ‘harmonisation spillovers’ looks into the benefits that third countries may
reap as they find it easier to deal with harmonised standards in the US and the EU, and in this
scenario the authors assume that the trade restrictiveness of NTMs maintained by the US and
the EU vis-à-vis third countries is reduced by 5%. 13
Table 3. Estimated impacts of TTIP on US and EU real income and exports for alternative scenarios
(percentage deviation from baseline in 2025)
Alternative scenarios
Targeted Harmonisation Ecorys
Reference Tariffs only
NTM cuts spillovers NTMs
Real income
US 0.3 0.0 0.3 0.5 0.2
EU27 0.3 0.0 0.2 0.5 0.1
Rest of world -0.1 0.0 -0.1 0.1 0.0
Exports
US 10.1 2.1 10.4 14.5 5.4
EU27 2.3 0.4 1.9 3.4 1.3
Rest of world -0.3 -0.1 -0.3 0.9 -0.2
Source: Fontagné et al. (2013).
2.2 Trade impacts of NTMs
It is difficult to provide a quantitative overview of the significance of NTMs. Anecdotal
evidence of particularly notable cases helps to foster an impression of the nature of the
13 For a more recent and more detailed discussion and analysis of such spill-over effects, see Lejour et
al. (2014).AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 9
problem, but the amount of trade displaced is more difficult to calculate. The most important
conflicts in agricultural trade between the US and the EU revolve around regulatory
differences, and the attention given to them indicates the weight of the issues the TTIP
negotiations on NTM matters will have to deal with. Yet, there are many more barriers of this
type that would require action if trade across the Atlantic were to be truly liberalised.14 To
what extent do these NTMs impact on trade flows, compared to the incidence of tariffs?
One way of trying to make information on NTMs comparable to tariff information is by
estimating their price impact. Where a given NTM acts as an effective barrier to imports, the
domestic market price of the product concerned in the importing country is kept above the
international market price (where necessary corrected for a relevant tariff). The resulting price
gap, expressed as a percentage of the international price, provides a yardstick of the NTM's
price impact that is directly comparable to an ad valorem tariff.15 Aggregate results for the
whole food and agriculture sector, as well as for manufacturing and services, reported in two
different studies are presented in Table 4, along with average tariff levels in the agriculture
and food sector. Even though the two studies (Ecorys, 2009; and Fontagné et al., 2013) arrive
at somewhat different estimates for NTMs, they both agree on three interesting findings.16
First, in agricultural and food trade between the EU and the US, NTMs result in higher trade
barriers than tariffs prevailing in that sector. Second, trade barriers resulting from NTMs are
higher in the food and agriculture sector than in manufacturing and services.17 Third, while
tariffs in agriculture and food are higher in the EU than in the US, NTMs in that sector are
more pronounced in the US than in the EU.18
Table 4. Estimates of ad valorem equivalents of NTMs and tariffs in the sector of agriculture and food
in the EU and the US
EU US
NTMs: Fontagné et al. 48.2% 51.3%
NTMs: Ecorys 56.8% 73.3%
Tariffs in agriculture:
simple average MFN applied 13.2% 4.7%
Sources: Ecorys (2009); Fontagné et al. (2013) and WTO, ITC and UNCTAD (2013).
3. Possible modalities for the negotiations
The way in which the US and the EU have negotiated agricultural and food issues in other
bilateral agreements suggests the likely modalities for the TTIP. The US and EU trade
14For a list of relevant NTMs in trade between the EU and the US, based on various sources, including
an extensive business survey, see Ecorys (2012).
There are, however, alternative and more complex approaches to estimating ad valorem equivalents of
15
NTMs. For studies applying such alternative approaches, see for example Ecorys (2009).
16The ‘Ecorys NTMs’ scenario, finally, is identical to the 'reference' scenario, except that the Ecorys
estimates of NTM restrictiveness in the US and the EU are used instead of those estimated by Fontagné
and his colleagues (see Table 4).
Alternative studies yield different results in this regard. For example, Francois et al. (2013) find that
17
NTMs are highest in the sectors of cars and chemicals, followed by processed foods.
18 Using data at a more disaggregate level, another study finds the tariff equivalent of NTMs to vary
considerably across individual products within the food and agriculture sector (Felbermayr et al., 2013).
It also finds, contrary to the studies cited above, that tariff equivalents of NTMs in the EU are higher
than those in the US, where estimates are available for both entities.10 JOSLING & TANGERMANN negotiators have accumulated ample experience with negotiating agricultural provisions in FTAs, and there are many other such agreements that provide examples.19 A general overview and a few concrete examples from existing FTAs will suffice to illustrate some of the major elements that trade diplomats find on the FTA negotiating table, and the room for manoeuvre they can potentially use. 3.1 Negotiations on market access A significant part of FTA negotiations traditionally deals with tariff cuts. The simplest techniques of cutting tariffs in an FTA is to establish a timeline over which tariffs on bilateral trade would go to zero. Products are often grouped into categories, depending on whether the tariffs are to disappear immediately on the FTA coming into force or over a specified time- period. Many agricultural and food items could be liberalised on such a schedule. But in the case of particularly sensitive sectors, several options are available for introducing modalities specific to agriculture. One of these is exclude some agricultural lines from the duty-free treatment. 20 As was shown above, there are several sectors, including dairy products and sugar, where high tariffs are found in both the US and the EU. The existence of these ‘sensitive’ products in the agricultural sector, often protected by mega-tariffs, is the major reason why most regional trade agreements (RTAs) do not achieve complete tariff elimination on all agricultural products. For example, the EU's RTA with South Africa, in force since 2000, foresees zero duties on the EU side for no more than 73% of all agricultural tariff lines; the RTA between the EU and Korea, on the other hand, in force since July 2011, provides for zero duties for imports into the EU on 97.9% of all tariff lines in agriculture (WTO, ITC & UNCTAD, 2013). Under the RTAs the US has with Chile and Morocco, the US is committed to apply zero duties to 100% of the agricultural tariff lines, while in the case of its RTA with Peru that share is 97.1% (WTO, ITC & UNCTAD, 2013). One notable exception is that in the FTA with Australia sugar was excluded altogether from the tariff elimination commitment. A second option that can be used in FTA negotiations over agriculture is the length of the transition period over which tariff cuts are phased in.21 Obviously, where tariff elimination is considered politically difficult, a longer transition period can be used to attenuate some of the pain. Fulponi et al. (2011) have analysed 55 selected RTAs and found that on aggregate they provided for duty-free treatment of slightly more than 90% of all tariff lines in agriculture, although that level is on average reached only after a transition period of somewhat more than 15 years. Within the product groups of dairy and sugar, however, only 72% of tariff lines were agreed to see complete tariff elimination in this set of RTAs. The US regularly uses the device of categorising products into categories, where one category is liberalised on signing and other categories reach zero tariffs over different lengths of time. Eventually these transition periods end, and the degree of certainty given by such reduction schedules is itself a useful signal for investors and farmers. A third relevant option regarding ‘sensitive’ products is to agree on tariff cuts for only limited quantities of imports, implemented through tariff rate quotas (TRQs). For example, under its 19For a more comprehensive overview of the treatment of agriculture in existing FTAs, see Fulponi, Shearer and Almeida (2011) and the literature referenced there. 20GATT Article XXIV:8(b) requires that duties are eliminated “on substantially all trade” between the partner countries in an FTA. Although often discussed, a legal definition of which share of trade constitutes “substantially all the trade” has never been agreed. 21In this context, GATT Article XXIV(5c) speaks of a “reasonable length of time”, which the Understanding on the interpretation of Article XXIV of the GATT says “should exceed 10 years only in exceptional cases”.
AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 11 FTA with Egypt, the EU applies TRQs to the importation of 34 agricultural products, while the US-Australia FTA specifies TRQs for imports of 17 agricultural products into the US (Fulponi et al., 2011). An important consideration in negotiating TRQs is whether the import quantities concerned can grow over time, and at which rate. After all, if the TRQ provides for sufficiently fast expansion of the preferential quantity, then it can eventually become equivalent to an unconstrained tariff cut. Fears that trade liberalisation might result in import surges and consequent pressure on domestic farmers have led negotiators of some FTAs to include “special agricultural safeguards” in the agreements, based on price and/or quantity triggers. Fulponi et al. (2011) found several examples in their sample of 55 FTAs, including all six FTAs involving the US. Fundamentally the nature of these safeguards often resembles that of the Special Safeguards Provisions in the WTO Agreement on Agriculture, although the specific details and parameters vary considerably. The applicable product lists also vary from case to case, although livestock, dairy, poultry, and fruits and vegetables are frequently covered. The remedies allowed also vary, including the option to halt tariff reductions or even to revert to the MFN tariff. Typically, however, the special safeguard provisions expire when the FTA has reached the end of its transition period. Even though special safeguards may create some uncertainty for trade flows, if they allow agreement on deeper and faster tariff cuts in an FTA they could help in completing the negotiations. Many agreements also contain provisions for general trade remedies, i.e. anti-dumping and countervailing duty measures. They tend to make reference to the general rules under the GATT, but also sometimes modify them for trade within the FTA. 3.1.1 Rules of origin Since partners of an FTA typically want to avoid trade deflection, i.e. re-routing of imports from third countries through the FTA partner with the lowest tariff, rules of origin (ROOs) are also an important element of FTAs. Partners of an FTA maintain, contrary to those of a customs union, their national MFN tariff schedules applicable to imports from third countries. There is, hence, an incentive to re-route imports into an FTA partner with a high MFN tariff through the territory of an FTA partner with a lower tariff. Such trade deflection would effectively undermine the tariff protection maintained by the high-tariff partner. In order to prevent this from happening, FTAs require that goods imported into any of the partner countries must, in order to qualify for duty-free treatment, originate wholly or primarily inside the FTA. It is reasonably straightforward to define what “wholly” should mean in this context. However, many goods contain intermediate products (including agricultural commodities) imported from third countries. With a growing tendency for value chains to be extended across several countries, there are more and more products that include components imported from anywhere in the world, including of course from countries outside the FTA. Under these conditions it is a matter for negotiation to define which criteria must be fulfilled for a product to be considered to originate “primarily” from inside the FTA. Resolution on the question of ROOs can require considerable negotiation. The outcome will however be important to the relevance of the TTIP to agricultural and food trade (see Box 1). When deciding on the design of ROOs in the food and agriculture sector, it is worth remembering two implications for the functioning of markets which result from the fact that many agricultural products are so homogeneous in nature that their origin is essentially irrelevant. This means that, first, imported produce can replace the domestically produced output in consumption, with the result that an FTA country can (theoretically) export all its domestic output to the partner country, fully meeting even the most stringent ROO requirements. Where that is the case, no ROO can effectively exclude trade deflection (Josling,
12 JOSLING & TANGERMANN 1993 and 1997). Second, where the partner countries of an FTA are on aggregate a net exporter of a given product, the price of that product will in any event be at the world market level and not reflect tariffs that any partner maintains vis-à-vis third countries. In that case, trade deflection is not an issue, and no ROO for the product concerned will be effective in providing protection to its producers inside the FTA. Box 1. ROOs and EU FTAs When negotiating the ROOs for TTIP, two fundamental issues are relevant. First, the overall ‘philosophy’ needs to be chosen, in the sense that decisions are required as to how restrictive or liberal the US and the EU want the ROO to be. That philosophy will determine the criteria to be set for all the individual products, but it would also be reflected in a number of more general rules. In particular, most ROOs include a tolerance/de minimis clause specifying that inputs from third countries are allowed as long as their share in the value of the final product is below a given threshold, even where these third-country inputs would otherwise exclude the product concerned from preferential treatment. In most FTAs, that threshold is in the range of 7% to 10% (Donner Abreu, 2013). In the EU-South Africa FTA, however, it is generally set at 15%, but reduced to 10% for some agricultural products. Lower-than-the-generally-applicable thresholds are also set for certain agricultural products in many other FTAs. In the TTIP negotiations, the US and the EU could consider setting an example by agreeing on a comparatively high de minimis threshold, including for all agricultural products. Such a ‘liberal’ philosophy for ROOs could also include exemption from otherwise applicable rules where MFN tariffs meet given conditions. In particular, it could be agreed that ROO requirements do not apply to products where the difference between MFN tariffs of the US and the EU does not exceed a given margin, say five percentage points. The reasoning behind such an approach is that ROO requirements are not needed where the cost of trans-shipment through the partner country is higher than the difference in MFN tariffs. Given the geographical distance between the US and the EU, trans-shipment through the partner territory is rather costly, and hence the acceptable margin between their MFN tariffs could also be set at a reasonably generous level. Another expression of a liberal ‘philosophy’ behind ROOs is the degree of flexibility provided to producers. For example, a free choice could be allowed between two alternative criteria, say between a change in tariff classification and a minimum share of value added. A second fundamental choice for ROOs is the scope for so-called ‘cumulation’. It is typical for ROOs in FTAs to allow cumulation of inputs and value added across all FTA members when determining whether the product concerned has originated inside the FTA. Moreover, several FTAs also allow for 'diagonal' cumulation, i.e. inputs originating in third countries that benefit from some form of preferential treatment by the FTA partners. The EU has spearheaded the inclusion of such diagonal cumulation principles in its FTAs, in particular in its 'PanEuroMed' system of trade preferences with countries in the Mediterranean basin, but also in many of its other preferential schemes (Donner Abreu, 2013). The US also makes use of diagonal cumulation in several of its FTAs. It would appear only natural for a TTIP agreement to allow for diagonal cumulation to include all countries with which both the US and the EU have FTAs, and also those developing countries to which both the US and the EU have extended unilateral preferences under the GSP regime. In a way, this would be a generalisation of the suggestion to exempt products from ROO requirements where the difference between MFN tariffs of the US and the EU does not exceed a given margin: that criterion could be applied not only to MFN tariffs but also to preferential tariffs that the US and the EU charge on imports of a given product from the country concerned.
AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 13 3.2 Negotiations on subsidies Agricultural subsidies have been a large part of the contentious trade relations between the US and the EU over the years (Josling & Tangermann, forthcoming). In the context of the TTIP it is useful to separate out subsidies given on exports from that given to domestic producers through various farm programmes. The former is a more likely candidate for inclusion in a TTIP agreement. 3.2.1 Export subsidies As export subsidies for agricultural products are still legal, within given constraints, under the Agreement on Agriculture (AoA), they could potentially also be used to distort trade flows between partners of an FTA. That is why many FTAs require the elimination of subsidies on within-FTA exports, although sometimes only after a phasing-out period. Some FTAs also contain provisions aimed at avoiding distortions caused by subsidised exports from a third country to one of the FTA partners. NAFTA, for example, allows the US and Canada to subsidise exports of certain products to Mexico if Mexico imports products from third countries that subsidise their exports. 3.2.2 Domestic subsidies Domestic subsidies pose an interesting problem for FTA negotiations. In principle, like in the case of export subsidies, partners of an FTA may well have an interest in seeing domestic subsidies on intra-trade disciplined so as to avoid distortions. However, it is technically difficult, if not impossible, to cut domestic subsidies to only that part of output that will be exported to an FTA partner country: once output has left the farm gate, it can go anywhere. Hence, if FTA partners wanted to discipline domestic subsidies, the only feasible way to do so is to constrain them for all of domestic output. As this is precisely what is being dealt with in the WTO negotiations on agriculture, the conventional wisdom is that discipline on domestic subsidies can be agreed only at the multilateral level. This is probably also the reason why nearly all FTAs are essentially silent on domestic subsidies (except for remedies, see below). As a matter of fact, the need to discipline domestic subsidies effectively is sometimes used as one of the central arguments for continuing multilateral negotiations rather than leaving trade liberalisation to regional arrangements. However, one can also argue that there may well be good political reasons for considering the possibility of agreeing on domestic subsidy discipline in TTIP. Among these reasons is the fact that the US and the EU still have ‘rights’ to trade-distorting domestic support of about $90 billion under the AoA (Orden et al., 2011). Thus, in a way, negotiations on domestic support between the two cover a large part of the ground that is being debated in the WTO. By agreeing on reduction commitments between them, the US and the EU could set an example that the rest of the WTO membership would find difficult not to follow. This consideration resembles strategic ideas that some countries, including the EU, have in mind in the context of global climate talks, where they feel that pushing ahead with unilaterally set reduction commitments might persuade others to go along. The US and the EU could even try to inspire amendment of the WTO rules on domestic support by adopting a modified regime, for example by giving up on inclusion of market price support in calculating domestic support levels, on the grounds that price support is anyhow effectively constrained by tariff bindings and export subsidy constraints. The counter-argument, however, is that bilateral agreement on domestic subsidy disciplines in TTIP would give away negotiating chips that the US and the EU may need in the multilateral negotiations in the Doha Round, in particular vis-à-vis developing countries, which are trying to change the rules of that game in their favour in the current negotiations. It
14 JOSLING & TANGERMANN would, therefore, appear unlikely that the TTIP negotiations deviate from the tradition of not including disciplines on domestic subsidies in agriculture in FTAs. 3.3 Negotiations on regulatory convergence The most important, and at the same time the most difficult issue for liberalising trade between the US and the EU, will be to manage regulatory divergences and the resulting trade barriers in the form of NTMs. It is not unusual for regulatory issues to be problematic in trade negotiations. Several reasons can be offered for these difficulties. Traditional trade issues such as tariffs and subsidies are more transparent and quantitative: the effects of reductions in these trade impediments are easier to estimate. The reduction of tariffs also has an apparent objective (such as free trade) that can guide a process of transition and measure progress: no such clear objective is apparent with regulatory convergence or increasing compatibility. Neither is there an easy way to define when regulatory differences are themselves desirable, even if they have emerged from administrative happenstance or protectionist pressures. And, above all, the issues facing negotiators discussing regulatory convergence attract the interest of a wider constituency than does tariff reduction. Much of the (surprising) public interest in the TTIP negotiations, in particular in Europe, revolves around minor differences in such regulations as those dealing with the washing of chicken carcasses. Past FTA negotiations have adopted several different approaches to dealing with the question of regulatory divergence. While that issue is relevant across the board in all sectors, the trade problems caused appear to be particularly pronounced, acute and intractable in agricultural and food trade, above all those resulting from SPS matters. Although most, but not all, existing FTA agreements have some provisions relating to SPS matters and other NTMs, there is no obligation to include them at all in regional trade arrangements. WTO rules (GATT Article XXIV:8(b)) require FTAs and CUs to eliminate “duties and other restrictive regulations of commerce” on “substantially all the trade” among the partners, but explicitly exclude from that requirement those NTMs that are permitted under certain GATT Articles, including Article XX (which covers, among others, measures “necessary to protect human, animal or plant life or health”). However, a TTIP that, in its trade part, does not go beyond eliminating duties on US-EU trade is simply not conceivable. When the political leaders from both sides launched the negotiations in February 2013, they explicitly made the point that TTIP would address regulatory and other non-tariff barriers. This promise would also not be fulfilled if TTIP were to limit itself to an option that comes only marginally higher in the hierarchy, namely just reaffirming the intention of the participating countries to fully respect their rights and obligations under the relevant WTO provisions, in particular the Sanitary and Phytosanitary (SPS) Agreement. That option is used in several existing FTAs. There is nothing to be said against including a formula like that in an FTA, but there is also not much that speaks for it: governments of WTO member countries should anyhow live up to their obligations under the WTO. For TTIP this option is certainly not sufficient. After all, the existing WTO rules have not prevented barriers from inhibiting the free flow of trade across the Atlantic, and indeed have not guaranteed the absence of serious trade conflicts. There is, therefore, the expectation that TTIP goes beyond stating the obvious need to respect WTO obligations. Whether this means that TTIP would have to include some type of explicit and specific arrangement for all relevant trade barriers in agriculture is, however, a different question. But even if some negotiators might privately dream of sweeping some of the most intractable NTM issues under the rug so as to prevent them from getting in the way of concluding the overall deal, they will feel pressed to move at least one further step up in the hierarchy of options, which is to include at least some
AGRICULTURE, FOOD AND THE TTIP: POSSIBILITIES AND PITFALLS | 15 procedural provisions in the agreement, envisaging future efforts to come to grips with the issue concerned. Rather than only making general reference to given WTO rights and obligations, an FTA can also contain provisions going beyond multilaterally agreed rules, specifying how the FTA partners intend to implement WTO provisions in practice. In this regard, too, there are different ways of shaping this option, with varying degrees of concreteness and exigency. For example, the EU-Korea FTA has a chapter on sanitary and phytosanitary measures where a text of less than two pages contains fairly general provisions on how the two sides intend to deal with SPS matters. A much different example is the EU-Chile FTA, for which negotiators have worked out a whole agreement on SPS measures, annexed to the FTA. The agreement is rather specific and runs over nearly 40 pages. It also aims at developing a common understanding concerning animal welfare standards between the EU and Chile, although finally this focused exclusively on the stunning and slaughter of animals. This EU-Chile Agreement also includes provisions for matters which, as far as trade in animal products between the US and the EU is concerned, are laid down in the US-EU Veterinary Equivalency Agreement signed, after six years of negotiation, in 1999 (see below).22 It would, therefore, appear conceivable, if not likely, that this 1999 agreement, with amendments later agreed and possibly with further modifications, could also be annexed to a TTIP agreement. The Task Force that anticipated the agenda of the TTIP23 addressed the issue of regulatory change by defining the objective as to find “new and innovative ways” to reduce non-tariff barriers to trade and investment. This phrase may conceal a lack of agreement on which approach to take. One approach would be to tackle differences in regulatory philosophy, particularly in such areas as the role of science in regulations where public opinion is not fully convinced by research conclusions. The use of the ‘precautionary principle’ in EU legislation has generally been regarded in the US as a sign of weakness, allowing public opinion to intrude on matters that can be addressed by scientific enquiry. But any direct assault on these differences in the context of TTIP is likely to be counterproductive, hardening opinions on both sides of the Atlantic and reducing the chances of success. So the Task Force modestly called for the reduction of “unnecessary costs and administrative delays” arising from regulations. No one could be against that, nor could one argue against the consequent aim of improving the competitiveness of US and EU companies in third markets. And the key questions of harmonisation of standards and the mutual recognition of each other’s standards are addressed with caution: greater compatibility in standards is to be “promoted” “where appropriate”. To throw some more light on this part of the heavy package that US and EU officials find on the TTIP negotiating table, it is useful to consider the range of options as to how to deal with regulatory divergences in FTA negotiations, from the least to the most demanding in terms of negotiating effort. Clearly, none of these options would be applied universally to all NTMs: some cases may qualify for more progressive treatment than others. Also, the range can be 22 The EU also has sanitary and phytosanitary agreements with several other countries, either as separate agreements or as parts of FTAs. For a list of the agreements, see http://ec.europa.eu/food/ international/trade/agreements_en.htm 23A High Level Working Group on Jobs and Growth (HLWG), established in November 2011 and led by US Trade Representative Ron Kirk and EU Trade Commissioner Karel De Gucht, was tasked with identifying “policies and measures to increase EU-US trade and investment to support mutually beneficial job creation, economic growth, and competitiveness". Within less than 15 months, on 11 February 2013, the HLWG issued its final report (see HLWG, 2013).
You can also read
